Have you thought about your retirement? It’s not as far away as you think. If you’re of working age, now is the time to start planning and saving for retirement. The longer you wait, the most expensive it will be.
A 401(k) plan is a good place to start. It’s a retirement plan offered by many companies alongside other employment benefits. The biggest advantage of it is that you make contributions on a pre-tax basis. You can put this money aside before the IRS has a chance to take a chunk out of it. This is especially important for people in the top income brackets, but anyone who pays income tax will benefit.
There’s another tax benefit. As the value of your 401(k) grows over time, the tax on that interest is also deferred. You’re only taxed on it when you withdraw that money as income.
Many employers match 401(k) contributions. In other words, for every dollar you put into your 401(k), your employer will put some in, as well. Some companies match contributions dollar-for-dollar. Others match a certain percentage. Either way, it’s free money for you.
The money that you put into your 401(k) can be invested in different ways. The most popular are mutual funds that invest in stocks, bonds or money markets. You can design an investment portfolio that meets your personal needs.
The downside of keeping your savings in a 401(k) is that they’re difficult (and expensive) to withdraw in an emergency. Some companies have you sign a contract promising to work a certain number of years before you have access to their matched contributions.
Most people wait until retirement before withdrawing money from their 401(k) plans. You may also be able to withdraw it if you are laid off or become disabled, or you reach the age of 59 1/2.